This is certainly understandable. If you feel that answers to any of the questions asked by the committee would prejudice your investigation or prosecution of these cases, please so indicate. I am sure that all of the members will be sympathetic to the problem.

Mr. BLACKBURN. Mr. Chairman.

Chairman PATMAN. Mr. Blackburn.

Mr. BLACKBURN. Mr. Chairman, I want to seek recognition in order to give a personal welcome to the Commissioner of Internal Revenue, Mr. Thrower. He is from my State and my city. I just want him to know that he is welcome here. And I also notice his very charming wife is in the audience. I want to say we are happy to have you with us this morning.

Chairman PATMAN. Thank you. We are glad to have you with us this morning. You two gentlemen may present your testimony, you may identify the staff members accompanying you, if you please. Mr. Rossides.

STATEMENT OF HON. EUGENE T. ROSSIDES, ASSISTANT SECRETARY OF THE TREASURY FOR ENFORCEMENT AND OPERATIONS; ACCOMPANIED BY ROY T. ENGLERT, DEPUTY GENERAL COUNSEL; ROBERT T. COLE, SPECIAL ASSISTANT FOR INTERNATIONAL TAX AFFAIRS; MICHAEL BRADFIELD, ASSISTANT GENERAL COUNSEL; AND IRA TANNENBAUM, ATTORNEY, OFFICE OF TAX LEGISLATIVE COUNSEL

Mr. ROSSIDES. Thank you very much, Mr. Chairman.

I would like first to introduce the staff members who are with me here today from the Treasury.

On my far right is Roy Englert, Deputy General Counsel of the Treasury and formerly Chief Counsel of the Office of the Comptroller of the Currency; and on my immediate right is Robert T. Cole, Special Assistant for International Tax Affairs.

Also with us today but not at the table but available for questions is Michael Bradfield, Assistant General Counsel for International Affairs, as well as Ira Tannenbaum, from the Office of Tax Legislative Counsel.

Mr. Chairman, it is a great pleasure to be here today. I would make one brief comment before setting forth my formal testimony. We have discussed the point you raised regarding Assistant Attorney General Wilson, and he has pointed out that he endorses the objectives of the bill but not necessarily in its present form. I realize that the question was put to him, whether, in effect, he endorsed this bill, and he said, yes. What he meant, as his formal testimony pointed out, was that he endorsed the objectives of the bill, but that there may be certain problems of going too far.

Mr. Chairman and members of the committee, the Treasury Department appreciates the opportunity to comment on H.R. 15073, which is designed to prevent the use of foreign bank accounts for illegal purposes by U.S. citizens and residents. The bill would accomplish this by requiring U.S. banks to copy checks and certain other

instruments and maintain certain records; by requiring U.S. financial institutions and persons dealing with them to report certain U.S. currency transactions to the Treasury; by requiring persons importing or exporting substantial amounts of U.S. currency to furnish reports. to the Treasury; and by requiring citizens, residents, and persons doing business in this country to report certain transactions with foreign financial agencies which do not make their records available to U.S. authorities.

The bill provides that the detailed requirements are to be promulgated by the Secretary of the Treasury. To summarize our position, Mr. Chairman, the Treasury fully supports the objectives of H.R. 15073 to deal with secret foreign accounts which aid tax evasion and other violations of U.S. laws. We feel, however, that the bill goes too far and that additional work is required to determine the best way to achieve this objective without hampering the free flow of international commerce, without creating undue cost and administrative burdens on both the private sector and government, while preserving the traditional freedoms of American life, and the status of the dollar as the major transactions currency and reserve currency of the world. We believe that measures can be developed which would not create these problems and which would be effective in helping us fight tax evasion and other criminal activities of U.S. citizens and residents.

To some extent because of bank secrecy laws, we are unable to offer any precise estimates as to the extent to which U.S. citizens and residents use foreign bank accounts and the magnitude of the tax evasion and other criminal violations shielded by such bank accounts. I can say, however, that the Treasury regards any evasion as serious even if the total amount involved is not large.

Two areas of special concern to the Treasury are the use of foreign bank accounts by those involved in smuggling narcotics into the United States and by organized crime generally. The Treasury has given two programs the highest priority:

1. Prevention of the smuggling of narcotics, marihuana, and other contraband drugs into the United States; and

2. The fight against organized crime.

If information could be obtained about such accounts, it would be of great help in our efforts to stop smuggling of narcotics into the United States and our general efforts against organized crime. A number of narcotics smuggling financings have been traced to some of these foreign banks. Participants in organized crime frequently evade taxes and the prosecution of such evasion is often the only practical means to attack such crime.

I understand that the Securities and Exchange Commission, Mr. Chairman, will testify on the use of foreign bank accounts in connection with securities law violations. I will not discuss that aspect of the problem other than to indicate that the Treasury feels that the protection to the investor provided by disclosure, insider trading, antimanipulation and other rules, embodied in our securities laws, plays a significant part in making U.S. security markets attractive to investors, including foreign investors.

There is another area of equal concern to the Treasury. That is the evasion of income or estate taxes by otherwise law-abiding citizens and

residents. We properly regard such evasion as a serious crime, whether committed by a taxpayer who is a U.S. resident or by a U.S. citizen living abroad. The American tax system is grounded on voluntary compliance and, on the whole, that compliance is and continues to be excellent.

One of the foundations for this compliance is a feeling by taxpayers that other Americans are also paying their fair share of taxes. The citizen or resident paying the taxes which he owes has a right to demand that his neighbor, whether he is a man who stays close to home or who travels widely, also pay the taxes imposed by the Internal Revenue Code.

This administration has elevated the development of solutions to the foreign bank account problem from an ad hoc case-by-case approach to a foreign policy level. We have actively sought to enlist the help of the Government of Switzerland in dealing with these problems and are in the process of contacting the governments of some of the other countries with bank secrecy where Americans have accounts. We are exploring with officials of the Government of Switzerland the possibility of a mutual assistance treaty in criminal matters so that information can be exchanged for use in criminal investigations and prosecutions in a routine and expeditious fashion. This has been an interdepartmental effort and includes the active participation of the State, Treasury, and Justice Departments and the Securities and Exchange Commission.

Representatives of the Swiss Government visited the United States last April and an administration team visited Switzerland in June. Further talks have been held and presently both countries are studying a U.S. draft treaty in preparation for discussions at a higher level. We hope that these discussions will take place in the next few months. We trust that these discussions will lead to a meaningful treaty, agreeing, among other things, on the types of cases in which the mutually recognized need to enforce criminal laws takes precedence over the traditional Swiss requirement that banks keep the affairs of their customers confidential. We are confident that the Swiss are also anxious to do something about the use of secret foreign accounts by organized criminals.

Mr. Chairman, the United States must also look to its own laws to determine whether we are doing all that we can to stop tax evasion and other crime. The Treasury has, therefore, undertaken a full review of our existing legislation and administrative practices to determine what is required to increase our effectiveness against crimes which are facilitated by foreign bank accounts. We have formed a Treasury task force to review our current authority, to confer with the banking and other financial institutions on evasion techniques and possible remedies, and to make administrative and legislative recommendations. A number of possible approaches, some of which are similar to elements of H.R. 15073, are being considered.

Our concern is with American citizens and residents who violate tax and other U.S. laws. We are improving the means to detect and prosecute crimes where all of the events take place within our borders. But where our citizens and residents use foreign territory and institutions for criminal violations of U.S. law or for hiding the fruits of their crime, law enforcement requires special techniques.

The Treasury has had a highly useful experience in working with the private sector to cut down tax evasion. This was in the spring and summer of 1967 when we stopped the serious evasion of the interest equalization tax which had developed. At that time, we worked closely with U.S. brokers and banks to develop systems which would close loopholes that had been used to evade payment of this tax. Similarly, the Treasury intends to work closely with U.S. banks and other financial institutions to establish procedures designed to reduce the evasion helped by foreign bank accounts.

Without the cooperation of U.S. financial institutions, we cannot be effective in dealing with the use of foreign bank accounts by Americans who violate our laws. Without this help, we might find that we have succeeded in devising measures which give us mostly useless information or information which is difficult and time-consuming to utilize. While such measures might result in more information on certain routes used by Americans to and from foreign banks, other routes might be left completely unobserved.

will now outline some of the areas that the Treasury believes need to be explored for usefulness and feasibility in connection with the secret foreign bank account problem and set forth our tentative views on H.R. 15073.

BANK RECORDKEEPING

The Treasury is considering the extent to which additional records and reports of international transactions are practicable to require of financial institutions and to what extent they would be useful to the Internal Revenue Service and other law enforcement agencies in connection with investigations of tax evasion and other crimes.

H.R. 15073 includes recordkeeping requirements in title I. The principal recordkeeping provision of the bill requires banks to maintain (i) copies of checks and other instruments drawn on them and presented for payment, and (ii) a record of instruments received by them for deposit or collection with identification of the persons for whose account the instruments are deposited or collected. This is understood to go much beyond current practice and would result in a substantial increase in banking costs and charges.

As an objective, recordkeeping and reporting should provide benefits to law enforcement without undue interference with normal commercial transactions and undue cost and administrative burdens on both banks and their customers and Government agencies.

Clearly mounds of additional paper or microfilm which may be of negligible assistance to law enforcement officers are not an intended byproduct of this effort. If recordkeeping and reporting requirements are imposed, they should be limited to those documents which are the most significant in tracing tax evasion and other criminal violations, thus excluding small transactions and transactions which are not informative, such as, possibly, inter-bank transfers. An important purpose of these limitations would be to assure a volume of information that the Internal Revenue Service and other agencies are in fact able to work with. There is a point when the volume of records and reports becomes counterproductive.

We have not yet reached a conclusion on whether the additional records and reports on foreign transactions which might be required and which could be effectively utilized by the Internal Revenue

Service and other agencies would significantly add to our efforts to prevent the violation of our tax and other laws. We are in the process of learning much more about international transactions, existing recordkeeping practices, and the capacity of the Internal Revenue Service to utilize the additional records and reports which might be required.

FINANCIAL INSTITUTION CURRENCY REPORTS

Chapter 2 of title II of the bill requires reports, as set forth in Treasury regulations, of transactions involving the payment, receipt, or transfer of U.S. currency. The reports are to be filed by both domestic financial institutions, including currency exchanges, securities and commodities brokers, as well as banks, and one or more of the other parties to the transaction.

Banks currently are required to file currency reports, but these reports have been of limited usefulness because of uncertainty as to when they are required and the extent of the banks' responsibility to report the identity of the person engaging in currency transactions. We are inclined to the view that such reports should be continued and are seeking ways to increase their usefulness. It does not seem, however, that the requirements should be applicable except to financial institutions.

We are also considering how unnecessary reports might be avoided without an adverse effect on the utility of the reports so as to avoid unnecessary burdens on retail establishments that deal in cash, employers with cash payrolls, and the financial institutions which would be required to file the reports. Unnecessary reports, particularly when small amounts are involved, would not only impede commercial transactions, the lifeblood of our complex economy, but also make it more difficult for the Internal Revenue Service and other Government agencies to utilize effectively the reports. The existing rules might be modified so that a corporation or individual often involved in large currency transactions for legitimate purposes could obtain an IRS exemption for reporting.

If such reporting requirements are to be effective, individuals involved in currency transactions must be required to provide adequate identification to the reporting institutions.

INTERNATIONAL CURRENCY MOVEMENTS

Persons who do not use financial institutions to send funds out of or into this country but who export or import substantial amounts of currency or the equivalent by other means such as mailing or the physical carrying of currency could frustrate attempts to obtain information through financial institutions.

The bill would require a report of the physical movement of currency or coin of the United States in or out of this country of $5,000 or more or if the transferor has transferred more than $10,000 in the calendar year.

The Treasury task force is considering whether an approach along these lines would be useful and whether it is feasible. In evaluating such an approach, we must balance the freedom to travel without cumbersome formalities and legitimate enforcement needs. In addition, a number of specific problems would have to be resolved.

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